Shock! Horror!! China Output Growth Slows.

I observe today that China continues to reduce its holding of US treasuries: http://www.bloomberg.com/news/2010-08-17/china-cuts-long-term-treasury-holdings-by-most-ever-as-u-s-yields-decline.html

ISTM that reducing China's exposure to the US$ may be a precursor to allowing the Yuan to rise (so that doing so doesn't have too large an impact on the value of China's $ holdings). Allowing Yuan appreciation wuold counteract inflation, lowering the local cost of imported raw materials. I'd consider that a very positive move overall (if worrying for other US$ holders), which would help in rebalancing the global economy. It would be very interesting to know what China has switched that cash into.

With a "middle class" population larger than that of the US, and with car sales & energy consumption already having overtaken those of the US, I really can't see that nominal figures that show the Chinese economy still only being a fraction of the "size" of that of the US can be a fair representation of reality.

For those searching for bubbles, the most obvious one to me appears to be US treasuries. With a massively indebted state, how can a 10-year interest rate of just 2.7% be right? Moreover, once this realisation strikes the market, a downward spiral for bonds could be triggered, as investors demand higher rates to compensate for inevitable inflation to come, and those higher rates, in turn, force the Fed into more "money printing" to avoid growth being crushed by an increased cost of finance, thus stoking the inflationary fires. Leveraged hedge funds buying treasuries could also add to the coming selloff.

Mark

ISTM that reducing China's exposure to the US$ may be a precursor to allowing the Yuan to rise (so that doing so doesn't have too large an impact on the value of China's $ holdings).  It would be very interesting to know what China has switched that cash into.

Gold, if this slow-fuse strategy is to be believed:

http://www.economicpolicyjournal.com/2010/08/is-china-executing-cunning-sun-tzu.html

Enjoy!

In reply to StrollingMolby, post #2

Ah, somewhat similar to this old film....

http://www.imdb.com/title/tt0083006/

Thing is, it doesn't need any whacky conspirancy theories. You only have to consider what's in China's own best interests and the economic reality of a populous & industrious country with considerable resources of its own, that appears to be dragging itself up by its bootstraps. Less dependency on the "West" and more self-reliance would seem sensible... but economic destruction doesn't really serve anyone's interest. A "controlled adjustment", i.e. moving towards equalisation of living standards betwen China & the West, would be the ideal outcome from everyone's POV - but very hard to achieve. Continuing trade with the West remains desirable.

In reply to marben100, post #4

Oh indeed Mark - I agree completely. Thats why my whole investment theory long term is based around this central theme.

its in China's interests to manage the process carefully and slowly. Lettig it happen too quickly will just spook the horses and leave many trampled in the stampede.

OT(ish) but the increasing wages in China at the moment seem somewhat of a double edged sword. VBery good for increasing the domestic demand angle but negative obviously for margins for the exporters. However, the impact on the exporters is quite interesting since many companies, having invested hugely in setting up their plants in China wont be in a mad rush to close down those operations and move to yet another lower cost base.

More evidence of the direction the PRC is taking: http://www.ft.com/cms/s/0/81500cea-a9fc-11df-8eb1-00144feabdc0.html

China will allow foreign central banks and overseas lenders substantially to increase investment in its domestic interbank bond market, in a move aimed at encouraging internationalisation of the Chinese currency.

The People’s Bank of China, the central bank, said on Tuesday that it had launched a pilot project to allow more foreign access to its largely closed domestic interbank bond market to “encourage cross-border renminbi trade settlement” and “broaden investment channels for renminbi to flow back [to China]”...

Not sure whether it will catch on yet, but ISTM that the PRC is challenging the role of the US$ as the sole reserve currency (which is stated explicitly further on in the article). Little is veiled now about the PRC's intentions - but they have to remove more restrictions if their wishes are to gain traction.

Mark

In reply to StrollingMolby, post #2

Looks like it's a bit more sophisticated than that, SM, according to this: http://www.ft.com/cms/s/0/3752e7a0-aad0-11df-80f9-00144feabdc0.html

China more than doubled its direct holdings of South Korean treasury bonds in recent months as it turned to regional markets to invest some of its $2,450bn in foreign exchange reserves in currencies other than the US dollar and the euro.

Chinese holdings of the treasury bonds stood at Won3,990bn ($3.4bn) by the end of the June from Won1,870bn at the end of last year, according to the South Korean Financial Supervisory Service, the country’s financial watchdog...

Sounds like sensible diversification to me.... or, for the conspiracists, China would like to have the entire rest of the world owing it money. A much smarter way to rule the world than military force though, of course, you need that too as backup, in case your debtors think about defaulting. :~)

Speaking of the "big stick", I also observe this (from yesterday): http://www.ft.com/cms/s/0/8ecc39ba-a98a-11df-a6f2-00144feabdc0.html

China’s reluctance to come clean about the scope of its military activities increases the risk of misunderstandings in a highly charged part of the world, the Pentagon has argued.

In its annual report to Congress on China’s military and security developments, the US defence department also notes a steady increase in Beijing’s military capabilities, including hundreds of missiles in the Taiwan strait.

While Beijing announced in March a military budget of $78.6bn (£50.2bn) – the latest in 20 years of annual increases – the Pentagon estimates China’s total military-related spending for 2009 at more than $150bn...

I'll bet US$150bn spent by the Chinese buys a heck of a lot more "bang for their buck" (literally!) than when spent by the DoD.

Hey ho :-/

Mark

...and whilst it's all doom-and-gloom today for the "developed" markets, here's what's happening elsewhere: http://www.ft.com/cms/s/0/83541970-af95-11df-b45b-00144feabdc0.html

Japan’s economic snuffles contrast with the health of emerging Asia, where rapid growth has re-established itself since the global economic crisis.

Thailand, thought to be one of the region’s weaker economies because of its political problems, surprised economists this week by reporting year on year growth in gross domestic product of 9.1 per cent for the second quarter, in spite of more than two months of highly-disruptive anti-government demonstrations.

That followed comparable figures of 8.9 per cent in Malaysia, 12.5 per cent in Taiwan, 6.2 per cent in Indonesia, 7.2 per cent in South Korea and an extraordinary 17.9 per cent in Singapore. China had earlier reported growth of 10.9 per cent. India has not reported but a survey of economists by the central bank forecast growth of 8.7 per cent. The unknown is the extent to which these blistering growth rates are sustainable. Although South Korea and Thailand performed better than expected, growth slowed slightly in Malaysia and more sharply in China, where it was down from nearly 12 per cent in the first quarter.

Some of this was deliberate – as in China, where Beijing is deliberately slowing the runaway economy – or officially sanctioned, as in Malaysia, where the central bank is walking a policy tightrope between growth and inflationary pressures.

Clearly, the population and economies of those countries are not experiencing anything remotely resembling a recession.